At a Glance

Debt consolidation is a great way to eliminate high interest credit card debt, but how does that affect your credit score? Credit counselors will tell you that the loan is wasted effort if you don’t change your spending habits. Unfortunately, some folks don’t listen well and continue to use their credit cards after getting a debt consolidation loan. That will ruin your credit.


When you consolidate debt, you take out a new loan to pay down high-interest debt. In doing so, you are rolling all your payments into one monthly bill, ideally with a fixed interest rate. There are several ways to consolidate. The most common methods are personal loans and balance transfer credit cards.

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Will debt consolidation hurt credit score?

When you first consolidate your debt, your credit score could be temporarily negatively affected. However, keep in mind the positive impact will be better in the long-term.

Debt consolidation typically consists of opening a new line of credit, which will trigger a hard inquiry on your report. This can lower your score by a few points. Then, you’ll use that new credit to completely pay off some of your existing credit. This could potentially decrease your credit mix and age of credit, which could also temporarily lower your score. Increasing your credit utilization ratio could lower your score as well, so it’s important to try to keep that ratio as low as possible.

How debt consolidation affects credit?

Debt consolidation can both positively and negatively affect your credit, though negative impact is typically short-term:

1. Hard inquiry: A hard inquiry on your credit happens when you apply for new credit. Lenders do this to check your creditworthiness, and each hard inquiry can decrease your score temporarily. Multiple inquiries in a short period of time can have a greater impact.

2. Credit utilization: Your credit utilization ratio, which is the percentage of available credit that you’re using, makes up about 30% of your FICO credit score. The goal is to have utilization below 30%. If your utilization ratio increases after you consolidate debt, it could negatively impact your score. On the other hand, if you consolidate multiple credit card debts into one personal loan, your ratio could decrease and your score would improve.

3. Age of accounts: If you open new credit as part of consolidating debt, the average of your accounts will decrease and you could see a drop in your score.

4. Closing accounts: Closing a credit account after a balance transfer or debt consolidation loan could decrease your age of accounts or increase your credit utilization ratio, both of which could hurt your credit score.

5. Payment history: Payment history makes up about 35% of your credit score, so as long as you continue to make your payments on time, consolidating debt could help improve your credit score.

How debt consolidation helps credit score?

1. Amounts owed: One of the factors used to calculate your credit score is “amounts owed.” A debt consolidation loan will pay off those outstanding credit card balances all at once and put you on a system where you’re making a fixed monthly payment on the loan.

2. Payment history: You’ll have a set amount of time to pay the loan off, and each payment is reported to the credit bureaus. Make your payments on time and your score will go up as the balance comes down.

How to consolidate debt without hurting credit?

1. Use the funds to pay off your debt ASAP. Some lenders will pay your credit cards off for you when they approve you for a debt consolidation loan. If not, your best choice is to pay them yourself immediately. Get the money out of your hands before you spend it on something it wasn’t intended for. In some cases, there will be a few dollars left over when you’re done. Spend that if you like.

2. Pay your bills on time. Payment history makes up 35% of your credit score, so missing a payment can do fast, serious damage. Create and stick to a budget to make sure you have enough each month to make your payments, and enroll in autopay so you never forget.

3. Limit hard inquiries. Each time you apply for credit, the hard inquiry can impact your score. Do your research before applying to ensure you meet the qualifications, and get prequalified when possible (as that doesn’t impact your score).

What happens to the credit after debt consolidation?

What happens to your credit after debt consolidation will be determined by your spending behaviors both during the loan period and immediately following it. If you don’t use your credit cards and pay off the loan balance in full, your credit score should be in the “good” or “exceptional” range by the time you’re finished. If you’re still spending, it won’t be.

Ways to consolidate debt

There are several ways to consolidate debt, but the two most common are balance transfer credit cards and personal loans. If you’re a homeowner, you could also consider a home equity loan or home equity line of credit (HELOC). Both are secured loans, so interest rates should be lower. If you’re not a homeowner, choose one of the following:

1. Consolidate with a balance transfer credit card

Credit card companies looking for new customers sometimes offer an introductory period when you can transfer balances and get a 0% interest rate. That rate can last a few months, a year, or longer. If you feel you can comfortably pay off your outstanding balances in that time, this could be a good option for you. Search for “balance transfer credit cards” online.


  • A good or excellent credit score can land a lower interest rate plus 0% APR introductory period.
  • Consistent payments can boost your credit score.
  • Qualifying for a higher credit limit lowers your credit utilization ratio, improving your credit score.


  • A hard inquiry will temporarily impact your score
  • Not repaying before the intro period ends means higher interest rates and payments. This can lead to missed payments, affecting your score.
  • May increase your credit utilization, hurting your score.

2. Consolidate with a personal loan

Consolidating debt with a personal loan is a good option if you have multiple credit cards and outstanding loans. A personal loan to cover the total amount owed could lower your interest rates and condense all your debt payments into one single monthly loan payment. Interest rates on personal loans average roughly 9-10%.

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  • Qualify with a lower credit score than necessary for a balance transfer card.
  • Consistent payments can boost your credit score.
  • Can improve your credit mix and boost your credit score.
  • May lower your credit utilization ratio, improving your credit score.


  • May include a hard inquiry that will briefly lower your score.
  • May lead to more debt if you use space on your old cards, raising your credit utilization ratio and lowering your credit score.
  • Failure to make payments will harm your score.

3. Consolidate with a home equity loan (HEL) or HELOC

If you have equity in your home, you can borrow against it to consolidate debt. Either method will impact your score as they figure into your credit mix, amount owed, and payment history. They also include a credit check, which will temporarily lower your score.


  • Stable, fixed interest rate and monthly payments make it easier to budget and repay the loan.
  • Lower interest rates compared to other loan options.
  • Extended repayment periods can result in more affordable monthly payments.
  • Tax advantages if you use the funds to make home improvements or repairs.


  • You could lose your home if you default on the loan.
  • There’s risk of negative equity if there’s a drop in the local real estate market or desirability of your neighborhood.
  • Higher lending criteria makes it more difficult to qualify.
  • Longer application process is not a great option if you need cash fast.
  • Higher fees/closing costscompared to other options.

4. Consolidate with a 401(k) loan

A 401(k) loan allows you to borrow money from your retirement savings account (typically up to 50% for a maximum of $50,000 depending on your employer’s plan). You can then use these funds to consolidate debt, though they must be repaid plus interest within five years of taking out the loan.


  • No taxes or penalties with a loan, unlike a withdrawal.
  • Interest goes back into your retirement accountas you repay the loan.
  • No impact on your credit score, including missed payments.


  • Must repay your loan in full if you leave your job. Otherwise, you’ll owe both taxes and a penalty.
  • Loss of investment and growth opportunity if you borrow in a tax-advantaged account.

Alternatives to debt consolidation

1. Pay off debts on your own: Methods such as the debt snowball method or debt avalanche method can be used to pay off your debts without consolidating, though you must have sufficient income and make room in your monthly budget.

2. Debt management plans (DMP): Working with a credit counselor or debt settlement company won’t affect your score unless you sign up for a DMP. A debt management plan involves negotiating for a lower repayment and stays on your credit report until completed.

3. File for bankruptcy: If you’re drowning in debt, can’t or don’t want to take out more credit to consolidate, and aren’t able to repay what you owe, you may consider declaring bankruptcy. While this can clear some or all of your debt, it can be costly, take a long time, and significantly damage your credit score.

4. Debt settlement (only as a last resort): Debt settlement, when you negotiate with creditors to accept a smaller amount of money for what you owe, can be done on your own or with a debt settlement company. However, proceed with caution. Creditors are not required to accept your offer and this process can be costly and cause serious damage to your credit.


Depending on your financial situation and the approach you use, consolidating debt could save you money and help your credit score. Consolidation could also cost you in fees, interest, and more debt that hurts your score. Find out if debt consolidation is a good idea for you.

In the short-term, taking out a debt consolidation loan will drop your credit score by a few points because the lender does a “hard inquiry” on your credit report and you’re taking on new debt. The score will go back up in a few months if you pay off your credit cards.

You can get the most out of debt consolidation if you change your spending habits and don’t use your credit cards. Making your loan payments on time and not taking on any new debt will increase your credit score over time.

If you take out a debt consolidation loan, it will stay on your credit report for as long as the loan is open.

Yes, consolidation loans show up on credit reports. It impacts your average credit length, credit mix, and payment history.

This depends. The hard credit inquiry will only slightly affect your score, but missing payments can seriously impact your score. Keeping a positive payment history can improve your score over time.

You can consolidate debt with poor credit, but typically you need a score between 580 and 680 to get a debt consolidation loan. If your credit score is higher, you’ll qualify for lower interest rates and better terms.